Commercial Investment Real Estate September/October 2019 | Page 19

Calculate the Net Present Value of Occupancy for Each Lease In order to be effective, the lease comparison must take into account the time value of money (TVM). The value of cash flows depends on the magnitude and timing. Lease opportunities of the same length can effectively be compared as net present values of each lease. Using a discount rate specific to the user, calculate the net pres- ent value of Lease A and Lease B. Use discount rates of 8, 9, and 10 percent to calculate the net present values of the two lease alternatives. The choice of a discount rate is very important because it will affect the net present value of the leases and may affect the client’s decision, especially if the pattern of the cash flows varies significantly across leases, as shown in Table 4. Table 3: Calculating Effective Rates Total Effective Rent Total Effective Rate Average Annual Effective Rent Average Monthly Effective Rent Average Annual Effective Rate Average Monthly Effective Rate Proposal B $1,308,000 $54.50 psf $261,600/year $21,800/month $10.90 psf/year $0.91 psf/month $1,364,913 $56.87 psf $272,983/year $22,749/month $11.37 psf/year $0.95 psf/month Table 4: Net Present Value NPV @ 8% NPV @ 9% NPV @ 10% Advise the Client By every measure — total effective rent and rate, average effective rent and rate, and discounted effective rent — Proposal A is superior to Proposal B. Both options will satisfy the needs of your client, including the qualitative factors that also must be considered. But Proposal A is clearly the superior choice, despite the two appearing so similar. Properly using this comparative lease analysis model shows, by crunching the numbers, a little Proposal A Proposal B $1,075,112 $1,050,137 $1,025,970 $1,122,373 $1,096,372 $1,071,213 legwork can better position your client for success in the near and long-term future. Nicholas Leider is senior content editor of Commercial Investment Real Estate. Contact him at [email protected]. Editor’s note: This article was adapted from the CCIM course “User Cost of Occupancy Analysis.” For more information, visit www.ccim.com/education. New CE Courses for Designees Only Refresh Your Skills and Earn CE Credit Need to revisit your CCIM designation courses? CCIMs can now register for four exclusive online self-paced courses that cover core concepts. These condensed versions of the designation courses only take four to six hours to complete and can be purchased with or without continuing education (CE) credit. To learn more, visit www.ccim.com/designee-only or call [phone], opt. 2. *CE credit not available in all states. CIREMAGAZINE.COM Proposal A CI Concepts Revisited: Methods and Models Comprehensive review of CCIM designation core concepts including financial, market, investment and user decision analyses. CI 102 Revisited: Market Analysis Models Comprehensive review of how to perform market research, assess market demand, and forecast future demand and opportunities for commercial real estate investment. CI 103 Revisited: User Decision Models Comprehensive review of the space acquisition process, comparative lease analysis, valuing leasehold interests, and lease exit strategies. CI 104 Revisited: Investment Decision Models Comprehensive review of applying key investor decision-making analyses to optimize ROI, finance CRE investments, and effectively forecast investment performance. September | October 2019 17